Market Basket, the Free Market …and the smart thing

I’ve already written about why I believe for the Market Basket Chain, keeping Arthur T Demoulas is the right thing now lets briefly talk about why it is the smart thing.

We’ve already established that disputes not withstanding Market Basket remains a successful and profitable business that has provided rich rewards for its owners and its employees but I have absolutely no idea how to run a grocery chain, what business do I have saying to the board of directors of Market Basket that Arthur T. Demoulas is better qualified than Arthur S. Demoulas.  What is the overriding argument that even though Arthur T has run the business with a steady profit that Arthur S wouldn’t do better?  What business do I have in signing a petition in support of Arthur T breaking my rule against signing petitions on any type except for nomination papers for candidates for office?

Well there are several things, lets look at them in order:

1. Debt:

“To have the lowest prices you have to have the lowest costs, that’s only Natural”

Ernie Boch Sr

Anyone who has followed the budget crisis in Washington knows that one big chunk of the budget problem is interest on the existing debt, before you spend a single dollar on any problem or cut a single dollar you have to budget for the interest on the existing debt and if you think it’s bad now wait till the artificially low interest rates go back up

The same goes in business, if you want to make a profit you have to keep costs down. What do the prospective new owners have planned?

His (Arthur T’s) attorney said that those opponents have repeatedly pushed for Market Basket to borrow heavily in order to finance payouts to shareholders of more than $1.5 billion. The company is owned by nine shareholders, all members of the Demoulas family.

The profit margin in a supermarket is not huge, it relies on volume

The average supermarket has a profit margin of about 1 percent, according to Stacey Vanek-Smith of National Public Radio. Some experts suggest this figure might be as high as 3 percent. Either way, supermarkets are a volume business. The extremely thin profit margin in the grocery business comes from the large amount of competition due to the low barrier of entry into the market. Thus, a grocery store must make up for its low margin by selling large quantities of product.

What happens if a big chunk of that profit margin is eaten up in interest payments? Well if you lived in Massachusetts over the last 40 years you might have heard a certain car salesman explain this basic economic fact to you:

If those prices go up, shoppers have plenty of other choices. The supermarket business is highly competitive. Within easy driving distance of the Market Baskets nearest to me there are several Hannafords, A Shaws, A BJ’s and a pair of Walmarts and more.

Market Basket shoppers have plenty of other options in the case of a price increase and if management wants to draw a larger share for themselves AND increase debut at the same time that money has to come from somewhere but where?

2. Labor:

George Washington McLintock: Gave? Boy, you’ve got it all wrong. I don’t give jobs I hire men.

Drago: You intend to give this man a full day’s work, don’tcha boy?

Devlin Warren:
You mean you’re still hirin’ me? Well, yes, sir, I certainly deliver a fair day’s work.

George Washington McLintock:
And for that I’ll pay you a fair day’s wage. You won’t give me anything and I won’t give you anything. We both hold up our heads….

McLintock! 1963

One possibility to make up such money comes from labor, but is that the wisest move? Let’s look at a relevant example.

In an Ironic twist Hostess Twinkees are about to re-appear on the shelves of Market Basket stores this week. The Hostess Company went through a series of bankruptcies and last year a last-ditch effort to save the company as it was voted down by one of their unions. The company was liquidated, the employees let go and the jobs that are now being offered pay considerably less:

He could have applied to get his old job back now that the plant is churning out Twinkies, Zingers and Ding Dongs in preparation for a July 15 return to store shelves. But he said the current starting salary of about $11 an hour, with the chance to bump it to $14, is “a slap in the face.”

“When I left, I was making $16.53 an hour, so I just didn’t see the point,” said Mr. Davis, who worked at the plant for almost 22 years.

How did it eventually get to that point? Well one might credibly argue that the Union demanded too much at the time of the strike

Some former Hostess workers who belonged to the International Brotherhood of Teamsters still blame the baker’s union for the company’s demise.

“We might still have our jobs if they didn’t go on strike in November,” says Scott Quenneville, a former Hostess delivery driver and Teamster in Detroit.

While others can reasonably argue the management was mor interested in their own bonus’ or in keeping agreements they had already made.

The former Hostess’ bakery union shouldered $100 million in labor concessions before being asked to take an immediate 8 percent pay cut last year amid tumbling profits. At the same time, Hostess’ acting CEO exempted his $1.5 million salary from the cuts.

In other words you had unions and management at each others throat. If the unions in days gone by had looked long term deals that were not sustainable might not have been pushed, meanwhile if management had treated the workers as a vital part of the business that provided financial rewards for both, the need for a union might not have existed at all.

At Market Basket that problem doesn’t exist. The company is not only making a solid profit but the non-union employees particularly the ones who have advanced in the company over the years, have gotten a share of it as I mentioned yesterday.

The protesting shareholders have been especially outraged by a profit-sharing plan that they believe has enriched rank-and-file employees at the expense of the family. Indeed, Arthur T. Demoulas proudly declares that some employees retire with well over $1 million in their profit-sharing plans.

and more

In one telling episode, one of the funds in which the profit-sharing money is invested suffered a $46 million quarterly loss during the 2008 financial meltdown. Arthur T. Demoulas says he insisted that the company immediately make up the loss to his employees’ accounts. That enraged his cousins, who maintained that no investment comes without risk.

Now that might seem like a big one time chuck of change and it is, but think about it, how much good will does that buy? How much labor trouble did that prevent?

How much is a workforce like that worth? How many problems and expenses did the company not experience because of this? How many smart people who might have gone on to other better jobs in good economic times stayed because they knew they could advance, make a living and perhaps even retire in some comfort if they stayed where they were? How many times do you think a union rep came down to Market Basket and the old Demoulas and tried to recruit saying “We can do better for you” and were laughed at by employees who could say: “Is your union willing to do for us what Arthur T did?” As one employee put it:

“The man has made a lot of money,” said Burke, a Market Basket employee for 41 years. “But he’s done a lot for the people along the way.”

How much would you pay for a workforce who don’t begrudge or complain about a group of 9 shareholders making a combined $214 million dollars in a horrible economy?

3. Experience:

Could Marconi have invented the radio if he hadn’t by pure chance spent years working at the problem? Are these amazing breakthroughs ever achieved except by years and years of unremitting study? Of course not. What I said earlier about accidental discoveries must have been wrong.

Monty Python A book at Bedtime 1973

I’ve never met Arthur S Demoulas or Arthur T. Demoulas at least not knowingly.  I know the two sides of the family apparently don’t get along as sometimes happens in families and if there are personal issues between the cousins I neither know or am qualified to settle these disputes.

But if you ask me which cousin is more qualified to run the business that’s not hard to figure out.  The one who has experience

the Demoulas family member facing removal is the one whose side of the family actually works in the family business.

of many decades:

Arthur T., who has worked at the company for 40 years, argued that he has worked closely with the often contentious board over the years to build one of the largest and most successful supermarket companies in New England, with more than 70 stores and 20,000 employees.

knows the customers:

He warmly greeted every member of the staff and seemed to know many of the customers too.

“How you doing?” he asked a butcher. “And how’s your wife?”

“She’s almost done with chemo,” the man replied. “We’re hanging in there.”

And has not slowed down just because he has a whole lot more money than I do:

Another long-tenured employee, meat manager Steve Burke, 60, said Arthur T. Demoulas has “kept his nose to the grindstone” even after becoming a successful businessman.

Now again I don’t know Arthur S. Demoulas he may be just as dynamic, just as hard working and just as successful in running the business as his cousin, but let me ask a basic question:  Arthur T. Demoulas has demonstrated the ability to produce a profit in the worst economic times in our lifetime in an industry that has a tiny profit margin.  How wise is it to replace an experienced CEO with hands on familiarity with a company who has demonstrated success with someone less experienced in an economic climate where one foot wrong can put you out of business in a hurry?


Sheldon:   Hello, Penny. I realize you’re currently at the mercy of your primitive biological urges, but as you have an entire lifetime of poor decisions ahead of you, may I interrupt this one?

The Big Bang Theory  The Electric Can Opener Fluctuation 2009

One of the first rules I found from being in business if that there are two constant beliefs among people who have not been involved in it on a daily basis:

1. Your success, if any, came spontaneously.  You just declared your business open and the customers, readers and listeners and advertisers simply couldn’t wait to give you their business.

2. They likely could run your business better than you.

Right now Market Basket’s shareholders are making an excellent profit, but they think they can do better.  They have the right to make that conclusion and vote accordingly but I submit and suggest for all the above reasons: Debt, Labor and Experience the retention of Arthur T. Demoulas as the man in charge is not only the right thing for the company, it’s the smart thing to do.

And just as the free market rewards smart moves, it just as quickly punishes foolish ones.


The world runs on individuals pursing their self interest

Milton Freeman The Phil Donahue Show

You might notice in my 2000+ word argument above I didn’t answer the question I promised yesterday:  How is it in my own self interest if Market Basket keeps Arthur T. Demoulas?  After all I don’t know the man, none of my family works there and every single attempt I’ve made to contact the company for advertising over the years has been completely ignored despite my reach of my readership in the state.  In fact given that the board has the votes to get rid of Arthur it might seem in my best interest to back the other side thus increasing my chances of getting advertising.

Well there are two basic things:

1.  I live in Fitchburg Mass.  The city has come on some very hard times, and although there are other supermarkets only a few minutes away, in Leominster and Lunenburg.  The two Market Basket are the last supermarket still in Fitchburg, Victory Markets, Tom’s Food World, Iandolis, Piggly Wiggly and even Save a Lot have all closed and gone away.

If the board of directors makes a foolish move and puts the company in jeopardy the two Fitchburg locations, will be in jeopardy which means that many fewer entry level jobs for high school and college kids in one of the most depressed area in the state.

2.  As you know I make my living off my readers $305 a week for an awful lot of hours.  What you likely don’t know is I do almost all of the grocery shopping for the house.  While everyone knows I buy all of my meats at Romano’s Market I do my grocery shopping at Market Basket.

Why?  Because even though multiple Walmarts, Adli, Hannafords and Shaws are all within a 5-15 minute drive from my home none of them match Market Basket’s prices and it’s not close.

Let me tell you something.  When you’ve started your own business, empited your retirement accounts to keep the bills paid, when you are drawing your first pay in 5 years and that “check” its 37% of what you used to make with no benefits, no retirement and totally dependent on the mood of your readers and when you  don’t take a dime in food stamps, you learn in a hurry how to maximize your shopping dollars.

So yes I have a bias of self interest here.  Feel free to adjust your opinion of this piece based upon it. in any way you wish.


Olimometer 2.52

I mentioned yesterday that the stats for Monday dictated that the best move for me was to lead with Trayvon Market yesterday.

What a lot of regular national readers might be surprised to hear is my single most popular post yesterday was my post on Market Basket, in fact though a local story it outdrew all my Trayvon posts combined.

Since the blog is my primary income and since it’s tip jar hits that pays the bills $305 weekly paycheck lets see if the local readers can finish the job.

5 readers kicking in $22 fills DaPayCheck for the week and means Thursday, Friday and Saturday are tip jar shaking free.

What could be better than that?